How can you generate income in retirement? Now that you’re no longer receiving a paycheck, you may be concerned with how to replace your salary and cover your expenses.
You probably already have some income sources. Social Security is a major source of income for many retirees. For half of retirees it comprises 50% of their income and for a quarter of retirees it makes up 90% of their income, according to the Social Security Administration.
You may also have a pension and annuities. You may have assets like a 401(k) and your home, which can be used to produce income. Are all of these enough?
The answer depends on how much you need. A frequently cited rule is the 80% rule, which says you will need 80% of your pre-retirement income to maintain your standard of living in retirement. It assumes some of your expenses will decrease after retirement, like the cost of commuting to work, maintaining work attire, and contributions to retirement plans.
But this rule doesn’t apply to everyone. Research finds many retirees will be able to live quite well on 60% of their previous income, while others may need 100% or more. It depends on your income and expenses.
Table of Contents
Expenses in Retirement
What are or will be your expenses in retirement? Some of your expenses immediately after retirement will be about the same as they were before, such as housing costs (mortgage or rent), utilities, food, and insurance. And, as previously mentioned, some other expenses will go down, while some may go up.
Many retirees find their total spending increases in the first few years after retirement, as they travel and dine out more often. Then, spending may decrease and hold steady for a long period, and finally increase again as costs of healthcare and long-term care kick in.
The above is a common pattern, but it may or may not be yours. You’ll have to decide what to spend in retirement, then plan to generate enough income to cover it.
How to Generate Income in Retirement
Luckily, there are many more options for generating income in retirement than ever before. Depending on your situation, you may rely entirely on your savings, use your savings along with pensions and annuities, or combine the income from a part-time job with other sources to fund your retirement.
We’ll start with the most common one, Social Security.
Social Security
Almost everyone who worked for at least 10 years qualifies for Social Security retirement benefits. The amount you qualify for depends on your income, the number of years you worked, and your age when you apply for benefits. If you aren’t receiving Social Security benefits currently, you can view your projected benefits by creating an account with the Social Security Administration.
As of August 2023, the average Social Security retirement benefit is $1,793 per month. Your actual amount will almost certainly be different from this, and you also have to consider that taxes will be taken out as well.
Pensions and Annuities
Pensions and annuities from previous employment are not as common as in the past, but around 20% of retirees still receive them. They are most common among government retirees, but about 15% of private companies offer traditional pensions to retirees.
If you’re one of the fortunate ones, your pension can form a consistent, reliable income stream in retirement. The median private pension in 2021 for private company retirees age 65 and older was $10,606 per year, and for state and local government retirees it was $22,860 per year. While this may not cover all of your income needs, it can be a good supplement to Social Security and your other income sources.
Your Savings
If you don’t have a pension from a previous employer, you can possibly create one from your savings. For example, 68% of workers have access to an employer-sponsored 401(k) plan. You may also have other savings accounts you’ve accumulated over your working years.
Income Annuities
If you have a 401(k), IRA, or other retirement savings account, you may be able to turn that into an income annuity. Since the passage of the SECURE Act in 2019, several major financial institutions have begun including annuities as part of the retirement plans they offer to customers. For example, Fidelity offers a range of annuities through The Fidelity Insurance Network. Meanwhile, Nationwide offers a target date mutual fund that enables participants to grow their savings while also receiving lifetime income.
Annual Withdrawals
Another way to generate income is to make annual withdrawals from your 401(k) account. How much can you withdraw?
Suppose that in the first year of your retirement, you withdraw 4% of your 401(k) balance. Then each following year, you increase the previous year’s withdrawal amount by a percentage equal to the rate of inflation. For example, if the inflation rate in year 2 is 2%, then in year 2 you withdraw 2% more than you did in year 1. In year 3, if the inflation rate is 3%, then you withdraw 3% more in year 3 than you did in year 2.
Research shows by following this method there’s a 90% chance your 401(k) will not run out over a 30-year retirement. This assumes your savings are invested half in stocks and half in bonds.
Interest and Dividends
Another way to generate income from your savings is through interest and stock dividends. By investing in bonds and certificates of deposit (CDs), your savings may produce interest income. CDs and High quality bonds provide a reliable income stream and help cushion your savings against declines in the stock market. The returns you get depend on the price you paid and the interest rate on the bond. There are many different classes of bonds, including U.S. Treasury bonds, state and local government bonds, municipal bonds, corporate bonds, and even overseas bonds.
The bond ladder is a common income strategy. This involves purchasing CDs or bonds with different maturity dates. You use the interest from the bonds as income. As the bonds mature, you use the proceeds to buy more bonds. CDs and bonds with maturity dates further in the future generally have higher yields, but investing in longer-term bonds keeps your money tied up so you lose liquidity. Using a bond ladder lets you retain liquidity while also benefitting from higher yields.
Dividend-paying stocks can also be an income source. The idea is to buy stocks that have a long record of paying dividends reliably and of increasing their dividends each year. You keep the stocks and use the dividends as income. Although the price of the underlying stock may rise or fall each year, as long as the dividend is secure, so is your income.
Rental Real Estate
Another popular option is to purchase rental properties. Rental properties enable you to benefit from both price appreciation and rental income. Although there is effort required in selecting properties and managing them, real estate and property management companies can help. Turnkey properties are properties that are renovated and ready to purchase and immediately rent out, or may already be leased. Rental property purchases usually require a large upfront payment. If you don’t want to risk that amount, micro-investing platforms enable you to own fractional shares of rental properties and benefit from appreciation and rental income, with much less investment.
Your Home
An asset many retirees have is their home. You may have owned your home for many years, and as a result have significant equity. A reverse mortgage is a way to tap into your home’s value.
Reverse Mortgage
A reverse mortgage is where you borrow money using your home as security. The title to your home remains in your name and, unlike a traditional mortgage, you don’t make monthly payments. But interest and fees are added each month to the loan amount. The loan must be repaid when you no longer live in the home. The Home Equity Conversion Mortgage is the most common type of reverse mortgage and is for homeowners aged 62 or over. This page explains more about HECMs.
Rent Out Your Property
Renting an unused room in your house can help produce income while giving your some experience in real estate rental. If you don’t want to take on a long-term tenant, you can try short-term rentals through sites like Airbnb. Reputable short-term rental sites provide some tenant prescreening and offer some protection against damage to your home. Sites like Giggster also enable you to rent out your home or property for a party, meeting, corporate event, or even a film or video location.
If you don’t want to have a tenant live in your bedroom, but have an unused garage, large shed, or storage area, you could rent out storage space. Many people want to store their off-road vehicles, RVs, or boats but don’t have room at home. You can even rent out your driveway as a parking space. You can also rent other parts of your property such as your yard or your backyard pool. You can even rent out your car on a part-time basis.
Side Businesses
Retirement is a good time to cultivate your hobbies and passions that you might have had to put on the back burner during your working years. You may be able to turn some of those hobbies into side businesses that generate income. Here are just a few ideas. Note that some businesses require licensing and certifications, so be sure to check the laws and requirements in your area.
Gardening
If you have a “green thumb,” or you’re simply passionate about gardening, a home garden might be right for you. Gardens are attractive and enhance the beauty of your home. They’re also where you grow delicious fruits and vegetables. Plus, gardening is good for your health. You can grow food to save money on groceries and sell the excess produce and seeds to farmers markets, wholesalers, or retailers. Flower gardens yield blossoms you can sell. You may also offer gardening and landscaping services to other homeowners and local businesses.
Woodworking and Furniture Reselling
If you have the skills and time, you can make wood furniture and sell it to individuals and stores. You can also buy used furniture items, refinish and restore them, and resell them on sites like eBay, Craigslist, Facebook Marketplace, or OfferUp.
Home Maintenance
Many homeowners, especially older individuals, and businesses need maintenance services. From painting walls to installing ceiling fans to repairing appliances, there’s an endless need for handy services.
Photography
If you love photography, you might consider starting a photography business. Photographers are in demand for weddings, headshots, family portraits, real estate, fashion, and more.
Making Money Online
The Internet offers almost endless ways to make income online, without needing to leave home. While they may not cover all of your expenses, they can be a good way to bring in extra cash in your spare time, often for doing things you do anyway, like watching videos or shopping online. Here are a few examples.
Testing Apps and Websites
Companies always look for ways to improve their websites and create a better user experience. UserFeel matches these companies with individuals willing to test their websites and report on their experiences.
Take Surveys
Companies also want to find out the views and opinions of customers and potential customers. Sites like Survey Junkie and Opinion Outpost pay participants for completing online surveys.
Tutoring
If you want to help students with their studies over the Internet, being an online tutor is one way. Tutor.com helps teachers, professors, and industry professionals share their knowledge and experience with learners of all ages, from kindergarten up to and including adult continuing education learners. Tutoring allows you to set your own schedule and work remotely.
Customer Service
More and more companies are outsourcing their customer service to work-at-home reps instead of maintaining call centers and inhouse customer service staff. There are a variety of schedules available including daytime, evening, and weekends. Your job is generally to field customer questions through the phone or online chat. There are specialized positions in sales or tech support that have higher pay.
Customer service isn’t the only service you can provide remotely. Transcription, proofreading, bookkeeping, and virtual assisting are other services, to name just a few. Sites like Flexjobs and Remote.co can show you current remote positions that might interest you.
For more income ideas, you might consider part-time or even full-time retirement employment.